Morningstar DBRS' Takeaways From CREFC Annual Conference 2025: Data Centers Powering Up

As part of its takeaways series, Morningstar DBRS is publishing several write-ups about pertinent topics discussed at CREFC Annual Conference 2025, an industry conference in New York City for commercial real estate (CRE) and commercial mortgage-backed securities (CMBS).

The final panel of the first day highlighted data centers, which have grown into a significant piece of the CRE market. Data centers take many forms, from large build-to-suit facilities for a single tenant (referred to as power shells) to turnkey-type facilities that already have built-in components and only need a tenant. "We haven't seen much for power shells across the CMBS platform, but they're far more prevalent across asset-backed securities (ABS)," said Morningstar DBRS' Michael Vidmar, Senior Vice President, North American Real Estate Adjacent Ratings.

But it's not just power shells--data centers of all types and sizes have a longer history of securitization in master trust structures common in ABS. Meanwhile, data centers' expansion into CMBS is more recent, with the first deal emerging in 2021. The CMBS market is more focused on large hyperscale facilities, which house major cloud service providers like Microsoft Azure. When it comes to credit risk, Vidmar explained that a lot of the risk in ABS structures is mitigated through a diverse, granular list of tenants. For CMBS, credit risk is more idiosyncratic and depends on the tenant's lease terms and the data center itself. Finally, the structures differ between the two. The master trust structure in ABS provides greater flexibility for issuers as it can offer multiple issuances out of the master trust over time and add collateral, subject to eligibility criteria. In comparison, the typical data center CMBS deal is a single-asset/single-borrower transaction with static collateral, lockout periods, and yield maintenance.

ABS takes two-thirds of all data securitizations and CMBS takes the other third, but that mix may be changing. So far this year, Vidmar said there has been about $18 billion in new issuance and CMBS represents slightly more than one-third of that amount at $6.9 billion.

Over the years, data centers have required more and more power to operate, especially with the rise in artificial intelligence, which uses a significant amount of power and needs advanced cooling systems. The panelists noted how this could be an issue, given that power is already constrained across the U.S. Securing power could take as short as six months to as long as several years. Most of the demand for higher power comes from large tenants that want hyperscale centers, with one panelist highlighting that most requests for proposal are for more than 200 megawatts.

Power risk in securitizations is mainly mitigated by power agreements with utility companies. However, Vidmar said that there have been rumblings about utility companies contemplating clawing back any power that the data center isn't using and directing it elsewhere. There also may be restrictions on a data center's power usage efficiency rate. Older data centers operating less efficiently, with less ability to adapt, may be at greater risk.

Despite the concerns around power, the panelists agreed that they don't expect data center demand to slow down for the rest of 2025 and in 2026. Supply will continue to be an issue in tight Tier 1 markets like Northern Virginia. Tariffs will exacerbate supply chain issues and keep equipment and component prices high as contractors work with domestic manufacturers.

Written by Caitlin Veno

Notes:
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